As `lockups' expire, biotech shares may flood market

Biggest threat lies in dumping of stocks throughout industry

January 07, 2001|By Julie Bell | Julie Bell,SUN STAFF

Think of it as the biotechnology industry's New Year's hangover.

After partying through last year with a record 67 initial public offerings in the sector, a number of newly public biotechnology companies might see shares dive - or at least dip - in the first part of this year.

The reason: Company insiders and many large shareholders suddenly will be freed from "lockup" periods that have prohibited them from trading their shares.

The lockup expirations, which generally come six months after an initial public offering, could result in a flood of shares hitting the market. If that happens, sellers are likely to outnumber buyers, and the stock prices of companies involved would be depressed - perhaps even for months.

Lockups are nothing new. Investment bankers who underwrite initial public offerings use them to ensure a period of stability in the market for a company's stock after it goes public. But analysts say this year's wave of lockup expirations among biotechnology companies could have a broader impact within the sector, because so many are happening at once.

"There's the potential for downward momentum," said Morningstar Inc. biotechnology analyst Emily Hall, explaining that downward pressure on a number of biotech stocks at once could spur investors to dump shares industrywide. "That's probably the biggest threat."

Locked shares from 31 biotech companies will enter the market this month and next month, the merchant bank Burrill & Co. says. The 46 biotech companies that went public in the last half of last year all will have shares come unlocked in the first half of this year. In the first quarter, at least 582 million biotech shares involved in lockups will become available for trading, according to Legg Mason Wood Walker analyst Stefan D. Loren.

Just because shares come unlocked doesn't mean all of them will be sold - and it doesn't guarantee that the shares of a newly public company will fall. What happens to share prices will depend on a mix of factors, including company earnings, news in the industry and the performance of a company's experimental drugs in testing.

"The assumption that there will be a flood of shares is not a valid assumption," said G. Steven Burrill, chief executive officer of San Francisco-based Burrill & Co., pointing out that many company insiders won't want to sell. "Take the CEO: He's probably not going to sell."

But if sector-wide dumping occurs, it could hit companies that still need to do some serious fund raising. The industry raised a whopping $39 billion last year both publicly and privately, including $6.5 billion in initial public offerings, according to Burrill & Co. The fund raising left many companies richer than ever. But some, including Rockville-based biopharmaceuticals developer EntreMed Inc. and Osiris Therapeutics Inc. of Baltimore, a developer of stem-cell therapies, will run out of money if they don't raise cash in this year's first six to seven months.

Loren's research, based on information available on the Web site unlockdates.com, shows that shares to be unlocked often represent 65 percent or more of the outstanding shares of individual biotech companies. About 13.7 million shares of Rockville-based bioinformatics company InforMax Inc., for example, will come unlocked March 31, representing more than 70 percent of the company's outstanding shares. Based on the average trading volume in the shares, unlockdates.com predicts that it will take 65 days for that number of shares to be absorbed by the market.

"With some of these, it will take a year to clear all these shares," Loren said, referring to small, newly public biotechs that have low trading volumes.

There are ways companies can fight back. Even when sellers abound, Burrill said, investment bankers often work on a company's behalf to find buyers of large blocks of shares, softening the effects. Some companies even arrange secondary offerings as a way of organizing a market for IPO investors who want to sell unlocked shares.

Still, the propensity of stocks to fall when shares come unlocked is so widely known that many traders watch unlocking dates as an opportunity to short stocks, profiting when the prices fall. These traders borrow shares and sell them before the unlocking date, then buy the same number of shares later at a lower price before paying off the loan. Their profit is the difference between the higher price at which they sold the shares and the lower price at which they were able to buy them back.

Such shrewd traders research the holders of company stocks to determine whether they are likely to be sold on the unlocking date. Venture capitalists generally are more likely to sell their shares, because they must pay off the investors who contributed money to form their venture funds.

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